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Affordable housing in lieu fees must be shown to be reasonably related, and limited, to "deleterious impacts of new development" like other development fees

“Affordable housing in lieu fees” imposed by the City of Patterson on new residential development projects were invalidated by the California Court of Appeal for the Fifth Appellate District, in an unpublished decision issued on January 30, 2008. (Building Industry Association of Central California v. City of Patterson). The court unanimously held that the amount of the City’s housing in lieu fee (nearly $21,000 per home) was not calculated in conformity with “the legal standards generally applicable to development fees,” and that the fees were therefore not “reasonably justified” as required by the terms of a development agreement. The court invalidated the fee, awarded costs to the plaintiffs, and remanded the case to the lower court with directions to determine an appropriate remedy for the City’s imposition of unjustified and invalid fees.

Background: The City approved a development agreement in 2003 which provided that the developer would be subject only to City impact fees at the rates then in effect. The City’s housing policies at that time called for developers either construct a percentage of their project as affordable housing units or to pay a fee in lieu thereof, at the rate of $734 per home. The development agreement acknowledged that the City was supposedly reviewing the existing $734 housing fee, and the developer agreed to pay an increased fee that might arise from that revision process, provided that the increased fee was “reasonably justified.” The City subsequently amended its Housing Element, and changed its affordable housing policy to a new “inclusionary zoning” approach. The City then changed the way it calculated its housing fees, and in 2006 adopted a new fee in the amount of $20,946 per home. The new fee amount was based on the assumption that the City’s need for “affordable housing” over the planning horizon was for 642 new affordable homes in different income ranges. That target was taken from the local Regional Housing Needs Assessment, but was not related to any particular impacts of new residential development in the City, nor to any identified needs for housing caused by the particular development project. The developer, Morrison Homes, and the Building Industry Association objected to the City’s new fee calculation methodology and filed suit. The trial court concluded that the new fee appeared to be reasonable.

Appellate Decision: The Court of Appeal, however, reversed and directed the lower court to enter a new decision “that invalidates the $20,946 fee.” The court held that the legal standards governing development fees generally also applied to these “affordable housing in lieu fees” and that the City had failed to justify its new fees under those standards. The decision is significant for holding that non-traditional “inclusionary housing in lieu fees” such as this are governed by the standards applicable to other types of development fees for public facilities, and for its clarification of what those legal standards require in the way of evidence and analysis. Several requests for publication of the decision are anticipated.

The court interpreted the development agreement’s requirement that new fees be “reasonably justified” to mean that any increase in the housing fees would “conform to existing law.” Such existing law refers to the “legal standards generally applicable to development fees” including the “reasonable relationship” requirement as stated in the Mitigation Fee Act (at Government Code section 66001(b)), and as described by the Supreme Court in San Remo Hotel v. City & County of San Francisco (2002) 27 Cal.4th 643.

The court rejected the City’s method for setting the new fees because it was not based on any evidence demonstrating the necessary reasonable relationship between the amount of the fee and any deleterious impacts of new development:

“The evidence presented in this case reveals that the amount of the fee was not calculated based on the cost of City’s affordable housing need attributable to the 214 residential lots [the development at issue] that constitute the two subdivisions owned by Developer. Neither was it based on the affordable housing need attributable to the 3,507 unentitled lots on which it was imposed [projected future development in the City]. Instead, the Fee Justification Study shows that the affordable housing in-lieu fee of $20,946 per market rate unit was calculated based on an estimate of City’s need for 642 units of affordable housing. No connection is shown, by the Fee Justification Study or by anything else in the record, between this 642-unit figure and the need for affordable housing generated by new market rate development.”

The court held that the increase in the fee “is not ‘reasonably justified’ as required by the Development Agreement unless there is a reasonable relationship between the amount of the fee, as increased, and ‘the deleterious public impact of the development.’ [Citing San Remo Hotel, supra.] In short, the Development Agreement precluded City from imposing a fee that bears no reasonable relationship to the need for affordable housing generated by Developer’s project.”

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